Life insurance: questions and answers

1. Why life insurance?

Life insurance continues to be a very good way of protecting yourself and your family against existential risks and securing your financial future. It allows you to insure against death and disability, save for your own home or use the insurance as a pension provision. You’ll also benefit from tax advantages. Choosing the right insurance depends on your personal life situation and your long-term goals.

2. Term life insurance vs. whole life insurance

In general, there are two types of life insurance, which are largely different in whether they accumulate capital over the long term or not.

Term life insurance

Traditional term life insurance protects you and your family financially in the event of your death or the disability of the insured person (e.g. following an accident or serious illness). No capital is accumulated. A payout is only made if the insured risk occurs and the insurance cover applies. The premiums of this life insurance are relatively low. For this reason, there is no redemption at the end of the insurance if the insured event has not occurred.

Whole life insurance

Whole life insurance is different, because in addition to protection in the event of death and disability, capital is accumulated and paid out after the agreed contractual term – irrespective of whether the insured risk occurred or not. Whole life insurance is therefore also called endowment life insurance.

Both types of insurance are part of the third pillar of the Swiss pension system and are thus private provisions. While term life insurance can also be used to cover risks, whole life insurance is consciously used to plan financial savings for old age as well. This ensures that you can maintain your standard of living when you retire. Whole life insurance is also suitable for saving for a home and indirectly repaying a mortgage.

Life insurance doesn’t need to be expensive. Whole life insurance can be concluded for as little as CHF 100 per month, depending on the product. Employees can contribute a maximum of CHF 6,883 annually (CHF 574/month) to pillar 3a; self-employed persons with no pension fund can contribute a maximum of CHF 34,416 annually (CHF 2,868/month).

3. How and when can life insurance be paid out?

Here, too, there are differences between term life insurance and whole life insurance. The former is only paid out if the insured event occurs (e.g. death or disability). If this event doesn’t occur, there is no option to redeem the term life insurance.

Whole life insurance behaves differently, because it can be used to accumulate capital that is normally paid out on an agreed date (generally retirement).

You may withdraw your capital earlier, depending on whether the life insurance is in pillar 3a or 3b. In pillar 3b, the term and thus the date of the payout can be freely chosen.

In pillar 3a, the savings can normally be withdrawn no earlier than five years before and no later than five years after reaching normal retirement age. In addition, an earlier payout of pillar 3a is also possible in the following situations:

• When refinancing/remodelling/renovating an owner-occupied property
• When commencing a self-employed activity
• When emigrating from Switzerland
• When contributing to the pension fund or upon disability (under certain conditions)

4. Tax advantages of life insurance

Contributions to pillar 3a life insurance can (up to the statutory maximum) be deducted from taxable income, thus reducing your actual tax burden. A reduced tax rate is used for the payout of the capital.

Pillar 3b contributions cannot be deducted from taxes and the balance is taxed as an asset. However, the payout is not taxed and can be carried out at any time. 

5. Using life insurance to purchase a home

Anyone choosing whole life insurance at an early age can use the accumulated capital later on to finance an owner-occupied property. If your life insurance is in pillar 3b, you can have the balance paid out tax-free. There are generally two options for pillar 3a: you can withdraw the money early or pledge it. We’ll explain both options to you.

Early withdrawal of pillar 3a

If you want to buy a house in Switzerland, you must contribute at least 20% of the purchase price as equity. If you don’t have this amount on hand, you can withdraw it from pillar 3a. This also applies if you want to renovate or remodel an owner-occupied property. You can withdraw money from pillar 3a every five years and there is no minimum amount. The paid -out amount is taxed at a reduced rate (varies by canton).

Pledging of pillar 3a

You can also use the capital from pillar 3a as collateral for the bank by pledging the balance. By doing so, the financial institution where you take out the mortgage will have access to your capital. Normally, however, it only has access to it when the pillar 3a assets are paid out and it then uses them to repay the mortgage (more details on this point can be found in the section on indirect repayment). If at some point you are unable to pay the interest, however, the bank can directly access the balance in your pillar 3a account. As a result of this collateral pledge your bank can offer you better terms and conditions for financing.

6. Indirect amortisation of the mortgage with life insurance

Anyone who wishes to buy real estate in Switzerland needs at least 20% of the purchase price as equity. The first mortgage amounts to two-thirds of the purchase price (around 65%). If the share of equity is less than one-third of the purchase price (or around 35%), a second mortgage is required. In contrast to the first mortgage, however, this must be amortised (generally within 15 years or until the normal retirement date).

There are two options for amortisation of the second mortgage:

Direct amortisation

With this option, the mortgage is repaid to the bank in regular (annual) instalments. The advantage is that the mortgage debt and the expenses for mortgage interest continually fall. The disadvantage is that as the interest debt decreases, the amount that can be deducted from taxes falls as well. This results in a higher tax burden.

Indirect amortisation

With this option, the capital is not repaid directly to the mortgage lender (i.e. the bank), but rather into pillar 3a, e.g. a life insurance policy. This account is then pledged to the bank. The bank takes the money in order to amortise the second mortgage upon expiry (usually when the borrower retires). As a result, the mortgage and interest debt remains the same over the years, which results in a tax advantage because the debt can be deducted from the borrower’s taxable income each year in the full amount.  

The most suitable method of amortisation depends, of course, on the borrower’s situation and there is no single answer that applies to everyone.

If you’re interested in life insurance as a form of protection and as savings for old age, we recommend that you seek detailed advice to find the right product for your life situation and your future plans. 

Learn more about the following types of insurance as well:

Construction insurance
Owner’s insurance
Household insurance
Building insurance
Private liability insurance
Legal protection insurance